A dog undergoing an examination at a PetIQ clinic. PetIQ’s goal is to open 130 to 170 clinics this year, reaching 1,000 by 2023.
Courtesy PetIQ
If you’re treating your dog more like a person, you’re not alone. While the “humanization” of pets has gained traction for years, dogs may have made an inexorable leap from the back yard to the sofa as people and pets bonded during the pandemic.
“Owners are treating their pets better because they’re spending more time with them,” says Cord Christensen, CEO of PetIQ (ticker: PETQ).
Pet-supply sales are going strong as pet owners buy everything from kibble infused with quinoa and avocado to hip-and-joint supplements to prevent arthritis. Animal-health product sales are growing by 7% annually, reaching $11 billion in 2020. Retail sales are rising faster as volumes shift from vet offices to stores and online channels.
PetIQ, based in Eagle, Idaho, is flourishing in this climate, and its stock looks like one of the few bargains in the sector. The company manufactures and distributes pet-health products and operates veterinary clinics around the country. Wall Street sees earnings per share of $1.37 this year and $1.89 in 2022, or 38% growth.
At recent prices around $36, the stock trades for 19 times estimated 2022 earnings. That’s far cheaper than larger companies in the booming pet sector, including Chewy (CHWY), FreshPet (FRPT), Idexx Laboratories (IDXX), and Zoetis (ZTS). “Given where it trades, the whole company is undervalued,” says Oppenheimer analyst Brian Nagel.
PetIQ
Animal Health and Vet Services Company
Notes: E=estimate. *Earnings before interest, taxes, depreciation, and amortization
Source: FactSet
Fred Alger Management has been buying the stock since 2019 and now owns 15% of the outstanding shares. “We invest in companies that can save lives, time, money, and headaches, and PetIQ fits into that theme,” says Amy Zhang, an Alger portfolio manager.
Co-founded by Christensen in 2010, PetIQ has grown into the largest retail distributor of over-the-counter (OTC) and prescription products for pets; the company also makes 1,200 items, including products under brands it has developed and acquired, such as PetArmor, Sentry, and Minties. Acquisitions include Perrigo’s (PRGO) animal-health business and Capstar, which makes the best-selling OTC product for fleas.
An Idaho native, Christensen, 48, launched the company after working in retail for years, starting as a teenager at Albertson’s. He saw an opening to distribute animal-health products to retailers in 2009, then expanded to manufacture OTC items.
Distribution is low-margin, but PetIQ’s branded products generate healthy profit margins, and the overall product segment is growing at a 40% annualized pace. It’s also a cash cow that Christensen is using to expand into services. The company bought a clinic business in 2018, VIP Petcare, and now operates more than 3,400 pop-up clinics a year, offering services out of a van, mall, or store for a day or two a week. The idea is to bring the “Minute Clinic” model to pets, he says, administering vaccines and preventive care, and treating things like skin rashes or stomachaches—anything that doesn’t require anesthesia.
The next leg of growth is converting the pop-ups to permanent clinics in big-box retailers. Once the company sees enough demand in a location, it opens a “wellness center” in a high-traffic spot. It’s now operating 126 clinics in stores such as WalMart (WMT), Tractor Supply (TSCO), and Meijer. The goal is to open 130 to 170 clinics this year, reaching 1,000 by 2023.
Why go to a clinic rather than a vet’s office? For one thing, many pet owners don’t have a vet, especially if they’re new to pet ownership. Retail clinics don’t require appointments, prices are posted on walls, and they may be cheaper than traditional vets; PetIQ’s average customer bill is around $100, well below the $300 average at vet offices (not including surgeries). “There’s a high degree of opaqueness around vet care and younger consumers want transparency,” says Jefferies analyst Stephanie Wissink.
The clinic business is recovering from a pandemic-related slowdown; vets and technicians are going back to work as people get vaccinated, and sales are picking up. “We’re not declaring victory yet, but it’s heading in the right direction,” says Christensen.
The clinics aren’t much of a profit driver yet and generated an operating loss in 2020, due to store closures and employees staying home. But services should contribute more to revenue as PetIQ opens new clinics, and they could start to lift profits, depending on how quickly stores reopen. The company is projecting $950 million in revenue and $100 million in adjusted Ebitda, or earnings before interest, taxes, deprecation, and amortization, this year. Services are also higher-margin than distribution, and the clinics are becoming another sales channel for PetIQ’s products and other items. “The product business is important, but the growth engine is services,” Zhang says.
Some analysts see the stock as a way to play the boom in pet care, without paying an exorbitant price. Oppenheimer’s Nagel thinks it should get to $50 in the next 12 to 18 months, based on a “low-teens” multiple of enterprise value to estimated 2023 adjusted Ebitda. Wissink sees the stock hitting $43 as the company reaches $1.94 in earnings per share in 2022.
Christensen aims to double revenue and triple earnings by 2024. No matter what, his miniature English bulldogs, Q and Betsy, should be happy; they sleep at the office while he works. “I’m a better pet parent now than before I started the company,” he says. If his dogs could talk, they’d probably agree.
Write to Daren Fonda at [email protected]
